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Restrictive Covenant Provisions – Is Yours Enforceable?

Employment contracts containing “restrictive covenants” (a/k/a non-competition, non-solicitation or any other post-employment restriction on employee’s activities) are one of the most litigated legal issues in Illinois – and around the nation.

Two big developments came out of 2011. Foremost: the Illinois Supreme Court issued a decision in November 2011 which modifies how courts will evaluate the enforceability of restrictive covenants. Also, Illinois appellate courts have eroded the notion of continued employment serving as sufficient consideration for any change to a restrictive covenant.

Under Illinois law and the laws of most other states, restrictive covenants are “restraints on trade” and therefore, need to be carefully drafted to be enforceable. First, the restrictive covenant must be part of an employment relationship and supported by “adequate consideration.” Additionally, the restrictive covenant must be no greater than is required to protect the “legitimate business interests” of the employer.

With respect to whether a “legitimate business interest” is at stake, the Illinois Supreme Court ruled in its November 2011 decision that each covenant must be evaluated individually based on the “totality of the circumstances.” This holding rejected the two-factor test that had been previously used by courts. The Court held that, in evaluating the legitimate business interest at stake, some of the factors to be considered are: (a) whether there is a near-permanent customer relationship; (b) whether the employee gained confidential information about customers; and (c) the extent of the time and place restrictions. “No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.” Reliable Fire Equipment Company v. Arrendendo, 2011 WL 6000743 (2011).

Although the appellate courts and trial courts have not had time to interpret this decision, we believe the bottom line is that there is a bit more room for businesses to establish legitimate business interests, and in that regard the Court’s decision is a boon for businesses with restrictive covenants.

Adequate consideration is another fluctuating standard. While many courts have deemed “continued employment” as adequate consideration, that perspective has eroded considerably in the past few years. In 2011, the Fifth District Appellate Court characterized continued employment as “illusory” and – absent two years or more of continued employment – insufficient to constitute adequate consideration. Given the holdings of this and other recent decisions, new restrictive covenants should be supported by more than continued employment, such as a carefully crafted bonus or other benefit to the employee.

These recent cases highlight the evolving nature of employment law and the necessity of reviewing your company’s employment practices on an annual basis.